Brazil dips on investigation of Central Bank president; Gazprom prices upsized deal

By Reshmi Basu and Paul A. Harris

New York, July 23 - Brazilian bonds fell on news of an investigation into alleged tax evasion by Central Bank president Henrique Meirelles and monetary policy director Luiz Candiota.

Trading was mostly quiet Friday until close to the session's end the political scandal broke out in Brazil, weighing down on its paper.

Brazilian news magazine Istoe reported on its website that both Meirelles and Candiota were under investigation for allegedly not declaring a number of offshore accounts.

"This has brought a turnaround to the Brazilian market," said Enrique Alvarez, Latin American debt strategist at think tank IDEAglobal.

"You saw a markdown in Brazilian bonds before the end of the afternoon.

The spread of the Brazilian component of the JP Morgan EMBI Index was 17 basis points wider on the day, closing at 614 basis points. It had opened at 597 basis points and widened to as much as 623 basis points at one stage.

The Brazilian C-bond widened 21 basis points to 605 basis points.

But secondary trading was mostly quiet Friday ahead of the news.

"You had some upside drift in Brazil [before the news broke], Ecuador and Venezuela, and a bit of buying in Colombia and Mexico," said Alvarez.

Alvarez further added that the tone of the market over the last two days has been set by people interested in carry positions.

In other news from Latin America, Mexico's Central Bank raised interest rates for the fourth time this year, hoping to put a lid on a "significant" hike in core prices.

The Central Bank increased the money-market short to 41 million pesos per day from 37 million pesos.

The Mexico benchmark bond due was up half a point to 143 bid in the early afternoon.

Overall, emerging market paper traded flat to higher. The JP Morgan Index rose 0.07%. Its spread to Treasuries was unchanged at 471 basis points.

One corporate upsizes, another downsizes

Meanwhile the primary saw two deals price for a total of $2 billion.

Russia's Gazprom priced an upsized $1.25 billion of notes due 2020 (-/BBB-/BBB-) at par to yield 7.25%.

The asset-backed deal, increased from the planned size of $1 billion, was more than four times oversubscribed.

After being freed to trade, the issue moved above par, being seen at 100 1/8, 100 3/8 offered at 1 p.m. ET.

Crossover accounts took interest in the investment-grade security, the first from a Russian corporate.

ABN Amro, Merrill Lynch & Co. and Morgan Stanley ran the books for the Rule 144A/Regulation S bond offering.

Meanwhile, Export Import Bank of China (Chexim) priced $750 million of 10-year global bonds (foreign currency rating A2/BBB+) at 98.921 to yield Treasuries plus 93 basis points.

The deal, downsized from $1 billion, came in tighter than initial price talk of Treasuries plus 96 basis points.

A market source told Prospect News the book size was over $1.7 billion, a less than desired size, given its high-grade rating.

Citigroup, Deutsche Bank; Goldman Sachs & Co. and HSBC ran the books for the Rule 144A/Regulation S deal for the state-owned bank.

Russian paper a good buy, says risk analyst

On Friday, a small group of private investors offered to save beleaguered Russian giant Yukos from bankruptcy. The company had warned Thursday that it will run out of cash soon because of the government's freeze on its assets and bank accounts.

Russian authorities said they intend to sell Yukanskneftegaz, a subsidiary that produces 62% of the firm's oil and holds 58% of its reserves.

Proceeds would be used to pay $3.4 billion in taxes that the Government alleges is owed by Yukos from 2002.

On Thursday, Russia's paper traded down on Yukos concerns, which was called a knee-jerk reaction by Jephraim P. Gundzik, president of Condor Advisers, Inc., which provides emerging markets investment risk analysis.

"Yukos, whether they go bankrupt or not, is inconsequential to Russia as a credit.

"Actually it is probably good because in the short term it is going to boost oil prices higher, which is good for Russia overall.

"In the longer term, Russia is better off with [President Vladimir] Putin's plan to take tighter, stronger, closer control of the oil industry there.

"They are doing that so they can take better control output and prices."

"It's not credit negative. It's credit positive."

Furthermore, not even further tightening by the U.S. Federal Reserve will hurt Russia's paper, according to Gundzik.

"They [Russia] are not even going to be impacted by what does the Fed does.

"They are an oil credit. They are probably the best oil credit in the world right now because they have such large reserves and they have such tight control of the industry.

"They are not doing what Venezuela did five years ago - when they were producing as much as possible to saturate the market."

The Russia bond due 2030 was at 92¼ bid, up 0.375, in early afternoon.

Emerging markets see inflows, but investors cautious

News of the $2 million inflow to the dedicated emerging markets funds for the week ending July 21, as reported by EmergingPortfolio.com Fund Research, followed 11 consecutive weeks of net redemptions, a source told Prospect News.

In spite of the positive number, however, investors continue to appear cautious with regard to the emerging markets asset class.

Both dedicated high yield funds and international debt mutual funds (which can invest in paper from either emerging or industrialized countries), saw slight drop-offs in weekly inflows, relative to the previous week's numbers, the source added.

High yield saw a $197 million inflow, compared to a $340 million inflow for the week ending July 14.

Meanwhile international debt mutual funds saw a $131 million inflow, compared to a $250 million inflow the previous week.

Brazil corporates flat

An emerging market analyst told Prospect News that Brazilian corporates traded flat during Friday's session.

Brazilian beverage producer and distributor Ambev's bond due 2013 was unchanged at 108½ bid, 109½ offered from Thursday's session.

Petróleo Brasileiro SA was also unchanged at 94¾ bid, 95¾ offered from Thursday's session.

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